McMahon v. Christmann , 157 Tex. 403 ( 1957 )

Mr. Justice Calvert

delivered the opinion of the Court.

This case involves the construction of an oil, gas and mineral lease and the establishment of the rights of the parties thereunder.

The petitioners, as lessors, executed and delivered to the respondents, as lessees, an oil, gas and mineral lease on and to premises described as follows: “All that certain tract of land situated in the County of Yoakum, State of Texas, described as follows, to-wit:

The Northwest one-fourth and the West one-half of the Northeast one-fourth of Section 21, Block K, Public School Land in Yoakum County, Texas, and containing 240 acres more or less.” The lease was on a Producers 88 Special printed form, contained a covenant of general warranty and provided in usual and customary language for reservation to the lessors of a one-eighth royalty. The lease contained as a part of its printed provisions a proportionate reduction clause in the following language :

“If said lessor owns a less interest in the above described land than the entire undivided and fee simple estate therein, then the royalties and rentals herein provided for shall be paid the lessor only in the proportion which lessor’s interest bears to the whole and undivided fee.”

Attached in the body of the printed lease contract was a typewritten clause or “rider” reading as follows:

“The lessors herein reserve unto themselves their heirs and assigns, without reduction, as an overriding royalty, a net l/32nd of 8/8ths of all oil or gas produced and saved from the above described premises, free of cost or expense to the credit of the lessors into the storage tank or tanks or into the pipeline to which the well or wells on said land may be connected.”

At the time of the execution of the lease petitioners did not own the whole of the mineral fee estate in the 240 acres of land. They owned only an undivided l/6th interest therein. Their undivided l/6th interest is the arithmetical equivalent of a 16/96ths interest.

Petitioners do not question but that the proportionate reduction clause in the lease operates to reduce the normal royalty to which they are entitled from l/8th of production to l/6th of l/8th, or 1 /48th, of production. They contend, however, that the proportionate reduction clause has no application to the l/32nd overriding royalty reserved by them. Respondents contend, on the other hand, that the proportionate reduction clause applies not only to the normal royalty reserved but to the reserved l/32nd overriding royalty as well. If petitioners are correct in their construction of the lease it provides for a normal royalty of l/48th of production and an overriding royalty of l/32nd of production, or a total royalty of 5/96ths of production. If respondents’ interpretation of the lease is correct it provides for a normal royalty of 1 /48th of production and an overriding royalty of l/6th of l/32nd, or l/192nds of production, a total royalty of 5/192nds. We will first address ourselves to this point of difference.

As is often true in litigation involving the interpretation and construction of written instruments both parties insist that the instrument is “plain and unambiguous” and admits of no reasonable meaning other than that for which they contend.

Petitioners, as plaintiffs, having taken the position that the lease was plain and unambiguous, were not permitted on the trial to introduce extrinsic evidence of all of the acts and conduct of the parties leading up to the preparation and execution of the lease. They were permitted to prove that the lease was prepared by respondents, that the typewritten rider providing for the l/32nd overriding royalty was prepared by and attached to the lease by petitioners, and that as a part of the consideration for executing the lease petitioners were paid a cash bonus of $15.00 per acre on an ownership of 40 acres. At the close of petitioners’ evidence the trial judere instructed the jury to return a verdict for respondents, and thereafter he rendered judgment for the parties in keeping with respondents’ interpretation of the lease. The Court of Civil Appeals affirmed. 285 S.W. 2d 818.

In interpreting the lease it is the duty of the court to seek the intention of the parties. 31-A Texas Jur. 179, Oil and Gas, Sec. 109. The intention of the parties, as that intention is expressed in the lease, is to be ascertained by a consideration of all of the provisions of'the lease. 31-A Texas Jur. 181, Oil and Gas, Sec. 110, and by harmonizing, if possible, those provisions which appear to be in conflict. Woods v. Sims, 154 Texas 59, 273 S.W. 2d 617. If after established rules of interpretation have been applied there still appears to be a conflict or an ambiguity in the provisions of the lease so that it is susceptible of two reasonable meanings, then, and only then, is the court authorized to receive extrinsic evidence to resolve the conflict or ambiguity. Universal C.I.T. Credit Corp. v. Daniel, 150 Texas 513, 243 S.W. 2d 154; Lewis v. East Texas Finance Co., 136 Texas 149, 146 S.W. 2d 977.

If the clause providing for the l/32nd overriding royalty did not provide that the reserved royalty was “without reduction” the problem of construing the lease would present no great difficulty. The overriding royalty is, withal, “royalty,” State National Bank of Corpus Christi v. Morgan, 135 Texas 509, 143 S.W. 2d 757, and Griffith v. Taylor, 156 Texas 1, 291 S.W. 2d 673, and in the absence of the words “without reduction” the proportionate reduction clause would require its reduction to a l/192nd of production. However, the parties have put the words “without reduction” in the clause and we have no right to take them out unless the established rules of construction noted above dictate that action.

On the face of the lease the proportionate reduction clause and the overriding royalty clause present an obvious conflict. The first would require a proportionate reduction of the l/32nd overriding royalty and the second would prohibit its reduction. One of the rules of construction for resolving conflicts requires that typewritten matter in a contract be given effect over printed matter. J. K. Hughes Oil Co. v. Mayflower Inv. Co., Texas Civ. App., 193 S.W. 2d 971, 973, writ refused; Richardson v. Richardson, Texas Civ. App., 270 S.W. 2d 307, 311, writ refused. And see Annotation, 37 A.L.R. 820, et seq. That rule is peculiarly applicable here. When it is applied the proportionate reduction clause and the overriding royalty clause are harmonized and the language of each is given meaning. The language of the proportionate reduction clause is given effect as requiring a reduction of the normal royalty reserved in the lease, but it is not given an effect which would render the words “without reduction” in the overriding royalty clause meaningless. To refuse to so limit the effect of the proportionate reduction clause would necessarily result in a holding that the ambiguity in the lease cannot be resolved by rules of construction, a result which both parties disavow. This construction of the lease gives the petitioners a greater royalty than the usual l/8th of the mineral fee owned by them, but parties may validly contract for a greater royalty than l/8th of the lessor’s mineral ownership. Benge v. Scharbauer, 152 Texas 447, 259 S.W. 2d 166; Gibson v. Turner, 156 Texas 289, 294 S.W. 2d 781; King v. First Nat’l Bank of Wichita Falls, 144 Texas 583, 192 S.W. 2d 260, 163 A.L.R. 1128. We agree that in so far as the quantum of the royalty reserved in the lease is concerned the lease is unambiguous and we hold that the quantum reserved is a 5/9 6th interest.

The necessity for construction of the lease is not yet exhausted. The respondents insist here, as they did in their motion for an instructed verdict, that in the final analysis the question in the case is governed by the rule of estoppel laid down in Duhig v. Peavy-Moore Lbr. Co., 135 Texas 503, 144 S.W. 2d 878. In that case a grantor in a deed purported to convey fee simple title to certain land by a deed containing a covenant of general warranty. In the deed the grantor reserved and retained an undivided one-half (%) interest in and to all of the minerals in and under the land. One-half of the minerals in the land had theretofore been severed and on the date of the deed was outstanding in a third person. In that fact situation it was held that the covenant of warranty extended to the surface of the land and to one-half of the minerals therein, that there was an automatic breach of the warranty and that equity would estop the g-rantor and those claiming under him from asserting against the grantee and those claiming under it the title to the one-half of the minerals reserved and retained. The effect of the holding was to take from the grantor the one-half of the minerals retained by him, without reference to or regard for the intention of the parties, and give the same to the grantee in order to fulfill the covenant of general warranty.

We have examined the record on file in this court in the Duhig case. The rule announced was a novel one in the fact situation before the court. Its adoption was urged by the defendant in error (respondent) and by able amicus curiae. Its adoption was opposed by the plaintiff in error (petitioner) and by able amicus curiae. It is evident from the face of the court’s opinion in the case (153 Texas 503, 144 S.W. 2d 879-880) that able judges also differed on the wisdom of the adoption of the rule. None of the parties filing briefs cited any case in which the rule had been approved or applied. In support of its adoption of the rule this court cited the following cases: Robinson v. Douthit, 64 Texas 101; Baldwin v. Root, 90 Texas 546, 40 S.W. 3; Jacobs v. Robinson, 113 Texas 231, 254 S.W. 309; Caswell v. Llano Oil Company, 120 Texas 139, 36 S.W. 2d 208; Moore v. Crawford, 130 U.S. 122, 9 Sup. Ct. 447, 449, 32 L. Ed. 878; Smith v. Williams, 44 Mich. 240, 6 N.W. 662. None of the cases cited support the rule, except by analogy. Each of the cases cited involve an application of the well established rule of estoppel against the assertion by a grantor of an after-acquired title in contradiction of his covenant of warranty. In addition to citing the cases above noted the court quoted the opening sentence from 19 Am. Jur. 614, Sec. 16, the language of which gives seeming support to the rule adopted, but no case is cited by the writer of the text and an examination of the remainder of the section and of the cases cited in the footnotes shows that the writer was dealing with the effect of the rule as applied to an after-acquired title.

What has been said with reference to the history of the adoption of the rule of the Duhig case is not said in disparagement of the ultimate decision of the court to adopt and apply it. It is said, rather, in justification of our refusal to extend it to and apply it in the construction of oil, gas and mineral leases.

According to Shepard’s Southwestern Reporter Citations the Duhig case has been cited in some twenty-five cases subsequently decided. A reading of the cases in which it has been cited shows that whereas it has been cited in many cases involving the construction of deeds — in most of which it was cited on other points —and that the rule of estoppel has been applied in five of such cases, it has been cited in only two cases involving the construction of a mineral lease. It was cited in the opinion of the Court of Civil Appeals in this case and in the opinion of this court in Gibson v. Turner, 156 Texas 289, 294 S.W. 2d 781. The rule was not given controlling effect in Gibson v. Turner.

The rule having become an established one in the construction of deeds we have no occasion, in this case or at this late hour, to question its validity when it is so used. We have followed the rule in the construction of a deed as recently as 1953. Benge v. Scharbauer, 152 Texas 447, 259 S.W. 2d 166. But there is sound reason for declining to extend it and apply it in the construction of oil, gas and mineral leases. We know as a matter of common knowledge and experience that deeds are usually prepared by the grantor or by a scrivener of his choice under his direction. He rarely prepares and executes a deed which purports to convey and which warrants title to an interest in property greater than he owns. If through carelessness or otherwise he executes a deed which purports to convey and which warrants title to an interest in property greater than he owns there is some moral justification for taking from him as much of the interest which he does own as is necessary to make good his warranty. We also know as a matter of common knowledge and experience that mineral leases are usually prepared, or standard forms completed, by the lessee. Even though a lessee knows a lessor owns less than the full fee title to the premises on which a lease is sought he often, if not usually, prepares and insists upon a lease which purports to convey the entire fee in order to make certain that no fractional interest is left outstanding in the lessor. He is protected against the possibility of being forced to pay royalty on a greater interest than that actually owned by the lessor by the inclusion of a standard proportionate reduction clause in the lease. That clause protects the lessee but it does not operate to reduce the estate which the lessor purports to convey. Klein v. Humble Oil & Ref’g. Co., 126 Texas 450, 86 S.W. 2d 1077-1079. In many such cases, illustrated by the instant case, in which the lessor actually owns only an undivided interest in the minerals in the land described in the lease and in which there is a reservation of royalty, the lessee, by resort to the Duhig rule and even though owning through leases the entire 7/8th working interest in the remainder of the minerals, could take, without paying therefor, the whole of the interest of the lessor in the minerals, including that reserved as royalty, and could, as well, recover damages from the lessor for breach of warranty. It is unthinkable and contrary to all modern human experience in the oil and gas industry to suppose that one owning an interest in the mineral fee would lease that interest for development of the mineral estate with no intention of receiving any of the returns from production of the minerals.

In Benge v. Scharbauer, 152 Texas 447, 259 S.W. 2d 166, 169, we declined to extend the Duhig rule to transfer to a grantee any part of a 3/8th royalty provided for in a deed while at the same time giving effect to the rule to transfer to the grantee a part of a 3/8th interest in the mineral fee also reserved in the deed. We now, decline to extend the rule to oil, gas and mineral leases. The rule is an arbitrary one at best and it should not be applied to work an automatic transfer of rights and interests reserved to a lessor, a transfer which would all too often frustrate rather than effectuate the intention of the parties. In the interpretation and construction of oil, gas and mineral leases we will seek to give effect to the true intention of the parties, following in that endeavor established rules used to interpret and construe contracts and other bilateral written instruments. If that method of construction leads to a breach of warranty it is then soon enough to enforce the fulfillment of the warranty by estoppel or to award damages for a breach thereof.

It is stipulated in the record that respondents had full knowledge that petitioners owned only a 1 / 6th interest in the minerals in and under the 240 acres of land. We may accept as true the statement in petitioners’ brief that respondents themselves then owned 7/8ths of the remaining 5/6ths, or 70/96ths, of the minerals. Rule 419, Texas Rules of Civil Procedure. Petitioners reserved a 5/9 6th interest, as we have held, and their warranty therefore purportedly extended to the remaining 91/96ths. It thus appears that if the Duhig rule were applied in the construction of the lease the respondents who own in their own right 70/96ths of the minerals could, as a matter of law, take by estonpel the entire l/6th or 16/96ths owned by petitioners, including the 5/96ths reserved by them, and would then have a cause of action against petitioners for damages for breach of warranty of title to the remaining 5/96ths interest.¹

As we have heretofore demonstrated, when we seek to apply the lease to its subject matter we encounter serious difficulties. The lease purports to warrant title to so much of the mineral estate in the 240 acres of land as is not reserved to petitioners. It thus purports to warrant title to a 91/96th interest therein. The purpose and operative effect of the covenant is not to guarantee that the lessor has good title to the premises but to guarantee the lessee in his title thereto. 14 Am. Jur. 521, Covenants, Conditions and Restrictions, Sec. 51; McClelland v. Moore, 48 Texas 355, 363; Langford v. Newsom, Texas Com. App., 220 S.W. 544; Gibson v. Turner, 156 Texas 289, 294 S.W. 2d 781, 787. As to the 70/96th interest owned by respondents, therefore, the warranty, for all practical purposes, is satisfied. Rancho Bonito Land & Livestock Co. v. North, 92 Texas 72, 45 S.W. 994; Gibson v. Turner, 156 Texas 289, 294 S.W. 2d 781, 788. Title to an additional ll/96ths passed to respondents under petitioners’ lease and as to that interest the warranty is satisfied. There remains outstanding in third persons, however, an interest of 10/96ths to which the warranty purports to extend and to which respondents’ title has failed. The purported warranty of respondents’ title to this 10/96ths interest and the purported reservation to petitioners of a 5/96ths interest cannot both stand unimpaired.

If the warranty is enforced to the extent of its full purport the reservation will be destroyed. If the purported reservation is preserved the warranty will be breached pro tanto. This creates a latent ambiguity requiring that we repair once again to the intention of the parties for its resolution.

What did the parties intend? No doubt they intended that the covenant of warranty should have some operative effect or they would not have included it in the lease. No doubt they also intended that petitioners as lessors should have title to and enjoy the fruits of the reserved royalty. The parties were bargaining with respect to an interest of an undivided 16/96ths and not with respect to the whole of the minerals in the 240 acres of land. Respondents knew that petitioners owned only a 16/96th interest. They knew, moreover, as did petitioners, that they themselves and third persons owned all interest in the minerals over and above the 16/96th interest. Respondents paid a cash bonus on a 16/96th interest; they paid no bonus on a greater interest. There was no occasion for respondents to exact from petitioners or for petitioners to furnish a warranty of title to any interest greater than the ll/96th interest which they undertook to convey. It is evident that the parties intended the covenant of warranty to extend only to the ll/96th interest in the minerals title to which passed to respondents under the lease, and we so hold on this record as a matter of law. So holding preserves the reserved royalty and preserves the warranty for its intended purpose. There has been no breach of the warranty as we have interpreted it and the warranty cannot, therefore, be used by respondents as a vehicle for obtaining or for cutting down the royalty reserved to petitioners in the lease.

In their answer in the trial court respondents, as defendants, pleaded alternatively that the words “without reduction” were included in the overriding royalty clause as a result of a mutual mistake of the parties, and by cross-action they sought a reformation of the lease to eliminate the words. Inasmuch as the trial court instructed a verdict for respondents at the close of petitioners’ evidence the cross-action was never reached for trial and no evidence was offered thereon. They are entitled to a trial of their suit for reformation. The cause must therefore be remanded. Rule 503, Texas Rules of Civil Procedure; Southwestern Drug Corp. v. McKesson & Robbins, 141 Texas 284, 172 S.W. 2d 485, 487, 155 A.L.R. 1056.

The judgments of the Court of Civil Appeals and the trial court are reversed and the cause is remanded to the trial court for trial of respondents’ cross-action.

Opinion delivered May 29, 1957.

1 Respondents do not actually seek to achieve such an unjust or harsh result by invoking the Duhig rule; they seek only to use the rule defensively to effect a reduction in the l/32nd overriding royalty provided for in the lease. In their brief in this court respondents state: “Respondents have no desire to take away from Petitioners the interest which they really contracted for, and which Respondens really agreed for them to reserve.”